When investing, we needlessly complicate the process by overthinking everything, such as when to begin in regards with systematic investment plan.
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Saving money is not as crucial as growing your wealth. The sooner you invest, the greater the rewards later in life. While other investing alternatives are accessible, SIPs (Systematic Investment Plans) are one of the most prudent. Even among seasoned mutual fund investors, it is one of the most sought-after investment solutions.
Despite their ubiquity, systematic investment plan is often misunderstood.
What exactly is a SIP?
Systematic investment plan meaning is basically drop by drop, the bucket fills, as the adage goes. A SIP operates on the same principle. It enables you to invest a predetermined sum, as little as Rs 500, in a mutual fund every month. You may choose how often you wish to invest – weekly, monthly, quarterly, or even annually. And, over time, you will be able to amass a substantial quantity of money.
Let’s take a look at this through the lens of a loan. We apply for a loan when we want to purchase a house/car, support a wedding, or go on a vacation. It is mostly due to our inability to accumulate a lump sum of cash to make these purchases/payments. However, if we take out a loan to make these purchases, we can return it as a monthly EMI, a relatively small sum. However, in addition to the principal amount, we must pay interest on the loan. As a result, the key difference between a loan and a SIP is that with a loan, you must pay interest; however, with a systematic investment plan, you may create a high return to save a huge amount.
What is investment planning?
Investment planning is setting financial objectives and putting them into a strategy. The primary component of financial planning is investment planning. The determination of goals and objectives is the first step in investment planning. Then we must reconcile those objectives with our available financial resources. Several investment vehicles are available today, the most prominent of which are cash, shares, bonds, and property. So, depending on the available cash, we may invest in these vehicles to achieve our aims and objectives.
Systematic Investment Plan Types
The following are the several type of SIP:
This systematic investment plan enables you to raise your investment amount regularly, allowing you to invest more when you have a larger income or available amount to invest. It also aids in making the most of assets by regularly investing in the finest and highest-performing funds.
As the name implies, this SIP plan allows you to invest whatever amount you wish. Investors may adjust the amount invested based on their cash flow requirements or preferences.
This systematic investment plan enables you to continue investing after the mandate date has passed. SIPs often expire after one year, three, or five years of investment. As a result, the investor may withdraw the money deposited anytime he wants or according to his financial objectives.
How does a SIP work?
SIPs allow you to invest in any mutual fund and build wealth over time. In this context, earning profits and building wealth are not synonymous. Investing in fixed deposits only aids in the generation of returns. If you wish to build money, you may invest in SIP mutual funds. And this sum is automatically withdrawn from your bank account at the intervals you choose.
Assume you invest a particular amount in a monthly SIP and have set your deduction date to the 5th of each month. So, on the 5th of each month, this money will be automatically taken from your bank account and invested in the mutual fund of your choice.
The Advantages of SIP Investment
A systematic investment plan aids in compounding gains over time. In other words, when you invest through the systematic investment plan, your profits are reinvested in the mutual fund scheme. When the returns are reinvested, the compounding effect kicks in, assisting in building other wealth.
Low Initial Investment
A systematic investment plan is a monthly investment of a fixed amount. It alleviates the stress of investing significant money all at once. Over time, you may invest as much as you like and utilise SIPs to build a sizable corpus.
Lower Average Prices
You get more units when prices are low and fewer units when prices are high if you invest consistently over time. It helps to bring down your average cost of investment.
SIPs are a very handy method to invest money. They do not demand considerable market research or aggressive market reaction. It makes it simple for small investors to invest their money.
Simple and Practical
It makes investing more convenient because you may select any sum of Rs. 500 or more based on your cash flows. Furthermore, the systematic investment plan investing procedure is automated. Once established, there is no need to be concerned at each investment interval. A predetermined sum is taken from your bank account. This predetermined sum is placed with the mutual fund company to purchase units. The mutual fund units are credited to the account of your mutual fund.
How Does a Mutual Fund SIP Work?
The Systematic Investment Plan is implemented in three steps. Here’s how it works:
Stage 1 – Mandate
To invest in MF, investors must provide a mandate (permission to invest via SIPs). It may be accomplished by choosing the “Systematic Investment Plan” option when investing online. However, for the offline option, you must complete a mandate form and send it with the application form. You must also mention your preference for the date (on which the fund will be invested) and the amount on the form.
Stage 2 – ECS/Auto Debit
When you provide a mandate, the fund house debits your bank account through standing instruction for the selected Investment amount. The monies are subsequently transmitted through ECS to an MF scheme for investment. Similarly, the successive investment amounts will be auto-debited at the interval specified in your Systematic Investment Plan. You won’t have to worry about missing any payments this way.
Stage 3: Mutual Fund Unit Distribution
The funds deducted from your bank account are used to purchase MF units. You are also assigned MF units based on the closing NAV on the money transfer or check realisation day. Let’s have a look at an example to see how it works.
Assume you begin a Rs. 1000 Systematic Investment Plan on the 5th of each month. Then, on the 5th of each month, Rs. 1000 will be automatically deducted from your designated bank account and used to purchase MF units. In addition, the MF units will be acquired at the previous day’s closing NAV.
Things to Think About When Starting a SIP in 2023
Before starting your first SIP investing plan, you should consider a few things about the mutual fund scheme for which you are starting the SIP.
1. Have you established objectives?
It’s recommended not to begin investing by labelling “increasing money” your aim. Tie your investments to significant life events that may need a substantial sum, such as a larger house, your child’s education, or your retirement. It will allow you to keep track of your goals and the performance of each asset and make it easy to take corrective action when necessary.
2. What is your time horizon and risk tolerance?
When you have a goal in mind, you know how many years it will take to reach it. You may be willing to take on greater risk with a long-time horizon than with a short time horizon. If you’re nearing retirement and don’t want to take on too much risk, you may invest in short-term mutual funds.
Aside from the time horizon, your risk appetite is influenced by your income and psychological fortitude. For example, if you have a steady salary, you may be more willing to take risks since you have a steady cash flow each month. Some investors also struggle to hold their assets during a sell-off.
3. Have you decided on a mutual fund category?
It is an important issue since there are so many options here. Keep your time horizon and risk tolerance in mind when selecting a mutual fund category.
With a longer-time horizon and greater risk tolerance, you can generate better returns by investing in categories such as specialised funds or small-cap funds. Choose debt funds if you are at the opposite end of the risk spectrum or have a limited time horizon. Hybrid funds may be an excellent option if you fall anywhere in the middle. We offer a full guide on choosing mutual funds that you can read to assist you in making your decision.
Systematic investment plan (SIP) is a mutual fund company investment plan in which investors may regularly invest a certain amount of money in a mutual fund scheme. This strategy is very useful for individuals who want to invest a little money.
While the underlying principle of SIP remains the same, a few adjustments have been made in recent years. For example, the Securities and Exchange Commission (SEC) issued a new regulation in 2023 that permits investors to quit a SIP before the end of the investment period.
According to the new regulation, investors can quit a SIP with a 2% penalty if they redeem their investment during the first year. A 1% penalty is imposed on people who redeem their investment after the first year but within the investment period.